Beena ParmarMoneycontrolIn an attempt to help banks reduce their tax outgo, the Union Budget offered 1 percent additional tax sop on provisions towards non-performing assets (NPAs). However, bankers are not too happy as this may not be a substantial gain for them.
At present, only 7.5 percent of the capital set aside for NPAs and 10 percent of the rural advances are tax deductible from the gross income of the bank while all other earnings are taxable.
In the Union Budget 2017-18 presented on Tuesday, Finance Minister Arun Jaitley announced that the deductions allowed for NPA provisions made by banks have been increased to 8.5 percent of the income.
However, bankers were hoping for a 100 percent deduction on such provisions given the rise in the provisioning amount each quarter.
Rajnish Kumar, Managing Director of State Bank of India said, “I don’t know how much it is going to help. It is not a very significant increase.”
According to Kalpesh Mehta, Partner (banking), Deloitte Haskins and Sells, “Effectively, this means that 1 percent of tax expense will go down, which is a marginal benefit on the profit. It should have been removed completely as banks are anyways struggling with heavy bad loans and hence have strict IRAC (Income Recognition and Asset Classification) norms on provisioning.”
Currently, bank balance sheets are bleeding due to strict compliant norms on provisioning which is leading to capital erosion.
In loans, when the principal or interest component is unpaid for 90 days, a loan is termed as an NPA and banks have to make 15 percent provision. If it is unpaid for a year, it becomes a substandard loan and attracts 25 percent provision. And two years of non-repayment from the date of being classified as an NPA turns a loan into a doubtful asset, on which banks will have to provide 40 percent provisions. Within a year, it becomes a loss account requiring 100 percent provision if the bank isn't able to receive any repayment.
Hence, on a minimum of 15 percent provision, banks have to pay taxes on this which becomes a double burden on them.
Jaitley has also proposed to tax interest receivables on actual receipt instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks which are on par with scheduled banks. “This will remove hardship of having to pay tax even when interest income is not realised,” he added.
Read more: LIVE UNION BUDGET 2017-18 UPDATES
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